Hoping for a 2013 ‘dividend revolution’

The last two months have been a mini-Golden Age for the “special dividend,” as companies, anticipating that tax rates on dividends will shoot upwards on Jan. 1 as part of the fiscal-cliff fiasco, have accelerated payments that were originally scheduled for January. But as the Wall Street Journal’s Jason Zweig points out in a column this week, 2012 was also a record-breaking year for regular dividends, even before the fiscal-cliff panic. Companies in the Standard & Poor’s 500-stock index will have paid out $281 billion in regular dividends by the end of the year—17% more than in 2011, and 13% more than in 2008, the previous high-water mark.

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Stock traders dressed for a post-revolutionary era.

Zweig expresses hope that these rising payouts are harbingers of “a long-term change in the way companies treat cash and their outside shareholders”—a change that could be encouraging for retirees and other investors who need to rely on their portfolios for an income. A 12-year-span marked by two disastrous bear markets has broken investors’ faith that they can rely on stocks for low-risk growth; to keep investors on board, Zweig argues, more companies will need to pay higher dividends to compensate them for the perceived dangers of owning stocks.

The result could be something of a Chester A. Arthur stock market – one where most of the returns from the stock market come from dividend income, as was the case for U.S. stocks in the 19th century. And it would give older investors an intriguing option: They could think of the stock allocation in their portfolio as another income source, one that might occasionally give them a boost in the form of price appreciation as well. (Of course, there’s one big caveat: Dividend payouts aren’t guaranteed and can get slashed when a company’s earnings get squeezed, as investors found out in 2009, when S&P 500 dividends dove by about 20%.)

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